Omicron Technologies has $40 million in excess cash and no debt. The firm expect
ID: 2657774 • Letter: O
Question
Omicron Technologies has $40 million in excess cash and no debt. The firm expects to generate additional free cash flows of $32 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Omicron's unlevered cost of capital is 9% and there are 8 million shares outstanding. Omicron's board is meeting to decide whether to pay out its $40 million in excess cash as a special dividend or to use it to repurchase shares of the firm's stock.
Assume that Omicron uses the entire $40 million to repurchase shares. The number of shares that Omicron will have outstanding following the repurchase is closest to ________.
7.2 million
8.6 million
14.4 million
5.8 million
7.2 million
8.6 million
14.4 million
5.8 million
Explanation / Answer
Value of the company = FCF/ Cost of capital
= $32m/ 9%
= $355.56 m
Price of the share= Value/ Shares = 355.56/ 8 = $44.44
NUmber of shares repurchased = $40 m/ $44.44 = 0.9 m
Shares outstanding after repurchase = 8m - 0.9m = 7.1 m
ANSWER is 7.2 million (Since that is the closest value)
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